• Military Menu                       

• Introduction
• Systems
• Facilities
• Agencies
• Industry
• Operations
• Countries
• Hot Documents
• News
• Reports
• Policy
• Budget
• Congress
• Links

• WMD
• Intelligence
• Homeland Security
• Space

The Law Library of Congress, Directorate of Legal Research, LL File No. 2007-04070
U.S. House of Representatives, Committee on Foreign Affairs
Subcommittee on Middle East and South Asia; Subcommittee on International Organizations, Human Rights, and Oversight

Wednesday, July 18, 2007
Joint Hearing: "Reconstruction in Iraq's Oil Sector: Running on Empty?"
Statement of Issam Michael Saliba, Senior Foreign law Specialist
Law Library of Congress

U.S. House of Representatives, Committee on Foreign Affairs
Subcommittee on Middle East and South Asia; Subcommittee on International Organizations,Human Rights, and Oversight
Wednesday, July 18, 2007, 2:00 P.M.

Joint Hearing: "Reconstruction in Iraq's Oil Sector: Running on Empty?"
Statement of Issam Michael Saliba, Senior Foreign law Specialist
Law Library of Congress

Chairmen Ackerman and Delahunt, Ranking Members Pence and Rohrabacher, and Distinguished Members of both House Subcommittees,

I am Issam Michael Saliba, Senior Foreign Law Specialist for the Middle Eastern and North African Arab States, at the Law Library of Congress. I have also practiced extensively, both as an attorney and general counsel, in the oil and gas industry in several countries in the Middle East. I am honored to appear before you today to testify about the legal implications of the oil and gas draft legislation approved by the Iraqi Cabinet, but not yet enacted into law by the Iraqi Council of Representatives or Parliament. This proposed legislation is known as the "framework Hydrocarbon law," as referred to in Paragraph (iii) of the Initial Benchmark Assessment Report to Congress, dated July 12, 2007. I have relied in my analysis on a copy of the draft law posted on the official web site of the Regional Government of Kurdistan.[1] The intent of the proposed legislation may be summarized as follows:

1. to create an independent federal body with the power to make all final decisions on oil and gas activities in Iraq;

2. to open the Iraqi oil and gas sector to private investment by Iraqi and non-Iraqi investors; and

3. to expand the role of the Federal Government in matters related to the management and development of Iraqi oil and gas resources.

The draft law provides for the creation of a council called the Federal Oil and Gas Council (FOGC) or, simply, the Federal Council. This Council is composed of the Prime Minister, or his designee, as chairman and includes in its membership:

1. the Iraqi Government Ministers of Oil, Finance, and Planning;

2. the Governor of the Central Bank;

3. a representative of each Region;

4. a representative of each oil-producing governorate that is not organized into a Region;

5. the chief executives of the most important oil agencies, including the Iraqi National Oil Company and the Oil Marketing Company; and

6. a number, not to exceed three, of experts in oil, gas, finance, and commerce that shall be appointed by the Council of Ministers for a term not to exceed five years.

The Council is vested with the authority to approve all oil and gas contracts, including those intended to explore for new resources; develop existing discoveries not yet producing; or service and enhance the performance of current oil producing fields. The draft legislation allows the Federal Council to approve production-sharing agreement (PSA) contracts that give investors, Iraqis, and foreigners equity ownership in the oil reserves existing in their contract areas.

This type of contract is traditionally used when granting the contractor/investor the right to explore for hydrocarbon resources in new prospective geographic areas. In this type of aleatory[2] contract the investor undertakes the risk of losing all his investment capital if no commercially exploitable quantities of oil or gas are found within the contract areas.

It would be highly unusual in the industry, however, to use this type of contract to develop existing oil discoveries not yet developed, or to service and improve the performance of oil fields already producing.

The proposed law divides the oil resources in Iraq into three categories:

1. currently-producing fields identified in Annex 1;

2. discovered but not yet producing fields identified in Annexes 2 and 3; and

3. prospective exploration areas identified in Annex 4.

The draft law gives the Iraq National Oil Company (INOC) the right to manage, develop, and operate the fields identified in Annexes 1 and 2,[3] with the authority to enter directly into service and management contracts regarding the producing fields when necessary.[4] It also gives the Regional Authorities the right to carry out the licensing process related to the development of the discovered but not yet producing fields identified in Annex 3, through the contracting process adopted by the Federal Council with qualified international oil companies.[5] The prospective exploration areas identified in Annex 4 seem to have been left to be auctioned off to qualified persons by the Ministry of Oil and the regional authorities, each within their respective jurisdictions.

The draft law stipulates that the right to conduct petroleum operations shall be granted on the basis of exploration and production contracts concluded, in accordance with the relevant contracting process, between the Ministry of Oil or the regional authority and a person, Iraqi or foreign, natural or legal, who can prove to the Ministry or the regional authority, based on the criteria adopted for companies by the Federal Council, that he has the technical and financial ability necessary to conduct effective petroleum operations.[6] The Ministry of Oil is to prepare and the Federal Council is to approve model exploration and production contracts.[7]

The model contracts may be based on a service contract, development and production contract, or aleatory risk-based exploration contract.[8]

The Ministry of Oil, the Iraqi National Oil Company, and the regions shall each, within its respective jurisdiction, sign the initial contract with the selected contractor. A provision shall be included in the contract stating that the contract will become binding if not objected to by the Federal Council in accordance with the Federal Oil and Gas Law.[9]

The initial contract shall be referred to the Federal Council within thirty days from the date of signing; it otherwise shall be considered null and void.[10]

The Federal Council shall review the contract and inform the Ministry of Oil, the INOC, or the regional authority of its objections, if any, within sixty days, or within an additional forty-five days in certain circumstances. The contract will become final and binding if the Federal Council does not have any objections or does not act within the prescribed period of time.[11]

Of special interest is the situation in which there is serious departure in the initial contract from the criteria and model contracts adopted by the Federal Council. In such an instance, the objection to the initial contract by the Federal Council requires a two-thirds majority of the members present.[12]

The Federal Council may appoint Iraqis and foreign oil and gas experts to an advisory board called the Office of Independent Advisors to assist the Council in reviewing and evaluating exploration and production contracts and oil and gas field development plans. The Federal Council decides on the number of the advisors and appoints them by a unanimous decision for a period of one year, which can be extended.[13]

The role of the federal authorities in managing oil and gas resources beyond those identified in Annex 1 raises a potential constitutionality issue in the proposed law. Article 111 of the Iraqi Constitution[14] stipulates that oil and gas existing in all the regions and governorates of Iraq is the property of the Iraqi people. This implies that the Federal Government should have original power to regulate and manage all oil and gas activities. But articles 110, 112, and 115 of the Constitution may suggest otherwise.

Article 110 enumerates the powers exclusively reserved to the Federal Government such as conducting foreign policy, raising an army, and regulating trade across regional and governorates lines.[15] Concerning oil and gas resources, Article 112 stipulates that the Federal Government, concurrently with the governments of the regions and the producing governorates, undertakes the management of oil and gas produced from current fields and ensures the equitable distribution of the resulting revenue in a manner commensurate with population distribution in the various parts of the country. It further stipulates that the Federal Government and the governments of the regions and producing governorates together formulate the strategic policies needed to develop the oil and gas resources.[16]

Therefore, the power to manage existing oil and gas producing fields and to formulate development plans for oil and gas resources seems to be shared between the Federal Government and the governments of the regions and the producing governorates. The Constitution is silent on the role of the Federal Government in the management of future oil and gas discoveries or discoveries that have not yet been developed. Under Article 115 of the Constitution this means that the management of future or not yet developed discoveries belongs to the regional and local governments. Article 115 stipulates that all powers not exclusively reserved to the federal government are to be exercised by the regions and governorates; and that with respect to shared powers the priority shall be given to the regional and local laws in the event of a conflict arising between such laws and federal law.[17]

Another constitutional issue meriting attention, irrespective of the nature of the division of powers between the federal and regional or local governments, is whether an independent body such as the Federal Council can be given the power to issue final binding decisions on matters, such as managing oil and gas activities, that belong under the Constitution to other federal, regional, or local governmental bodies.

Final important points are:

1. there is apparently no agreement, yet, as to the content of the Annexes that must be a part of the present legislation;

2. the Kurdistan Region is proceeding with the enactment of its own oil and gas law that may be in conflict with the proposed federal legislation; and

3. that the proposed legislation does not address the issue of how the oil revenue should be equitably distributed among the various parts of Iraq. This has to be addressed in a separate law that the Council of Ministers must submit to the Council of Representatives.[18]

Thank you for your attention, and I would be happy to answer any questions you may have.

---

[1] Republic of Iraq, Draft Iraq Oil and Gas Law, 15 February, 2007 [draft legislation], available at Regional Government of Kurdistan, http://www.krg.org/articles/detail.asp?smap=&Ingnr=12&asnr=&anr=16644&rnr=95. The website of the Regional Government in Kurdistan is the best available source for the text of the draft law.

[2] An aleatory contract is one that depends upon uncertain contingencies. See Bryan A. Garner, A Dictionary of Modern Legal Usage (2d ed. Oxford University Press, 1995).

[3] Republic of Iraq, Draft Iraq Oil and Gas Law, 15 February, 2007, Article 6 (B) (First and Second) [draft legislation], available at Regional Government of Kurdistan, http://www.krg.org/articles/detail.asp?smap=&Ingnr=12&asnr=&anr=16644&rnr=95.

[4] Id. Article 8 (A).

[5] Id. Article 5 (F) (Second).

[6] Id. Article 9 (A).

[7] Id. Article 8 (C).

[8] Id. Article 9 (B) (Fifth).

[9] Id. Article 10 (A & B).

[10] Id. Article 10 (C).

[11] Id. Article 10 (D) (Third).

[12] Id. Article 10 (D) (Second).

[13] Id. Article 5 (C) (Sixth).

[14] Iraqi Const. art. 111 (2005).

[15] Id. art. 110.

[16] Id. art. 112.

[17] Id. art. 115.

[18] Republic of Iraq, Draft Iraq Oil and Gas Law, 15 February, 2007 [draft legislation], available at Regional Government of Kurdistan, http://www.krg.org/articles/detail.asp?smap=&Ingnr=12&asnr=&anr=16644&rnr=95.